I've done a bunch of panoramic pictures, and I've always stitched them together by hand. I wanted to try out some software to see if it would do a better job in less time, as stitching by hand takes a long time and has varying results.
Before I go over the software, I'll describe stitching by hand. First, take a number of overlapping photos, turning slightly every time. Then load all the pictures (one image per layer in the same canvas) into your favorite image editor. Align the layers two at a time, using common elements. Making the foreground layer 50% transparent helps with this. The edges of an image are more blurry than the center, so you'll want to line up elements further from the edges. Apply a layer mask to the foreground layer and mask out most of the overlap, with a gradient mask (100% transparent to 100% opaque) covering the best matching area. Mostly smooth areas like sky and lake will work best with a smooth gradient transition. Things with harder lines will work better with a hard transition between images, so draw those out directly on the layer mask. Lastly, adjust colors to match. Repeat till all the layers are lined up and blended together. Crop to remove the blank areas due to angle changes. This process works best if the angle changes are minimal.
One panoramic picture can easily take multiple hours with the manual method, which is really too much time. There are also problems that are harder to fix with the manual method, such as parallax motion problems.
There's a bunch of software out there to automate most of the work, plus do things that would be harder by hand (like rotation in the X/Y/Z). I tried out
Hugin, and it did a pretty good job. I just had to give it 5 common points between each pair of images, and it did the rest of the work. For the next panoramic pictures, I need to remember to turn off auto mode, or my camera will change white balance on me and the colors won't turn out very well.
By hand (photobucket resized this due to file size, and I got lazy and you can see a seam in the sky):
With Hugin (this compressed well for some reason):